Page 269 - RISK Management IC 86

(e) Non-insurance transfers : Rid the organization with funds that
originate within the organization ; or

(f) Risk retention : Characterized by paying losses with funds that
originate within the organization ; or

(g) Risk transfer : Using funds that originate outside the organization.

Risk control tool :
A technique designed to change the loss exposure itself, the objective
being to reduce the frequency or severity of the potential losses or to
make those losses more predictable.

Risk financing :
Measures to finance the losses that do occur. Funds may be required
to repair or restore damaged property, to settle liability claims, or to
replace the services of disabled or deceased employees or owners. In
some instances, the firm will decide not to restore the damaged
property or replace the disabled or deceased person. Nevertheless, it
may also have suffered a financial loss through a reduction in its
assets or its future earning power. The tools in this second category
include (i) those transfers, including purchase of insurance, that are
not considered risk control devices and (ii) retention, which includes
“self-insurance.”

Risk financing tool :
A technique designed to provide money to deal with those losses that
do occur.

Capital budgeting : A process used to determine whether to make
long-term (more than one-year) investments.

Critical probability method : A method that tells a risk manager to
buy insurance instead of retaining the exposure if the probability that
the losses will exceed the premium savings exceeds a critical
probability selected by the risk manager. Persons with high worry
values will normally set low critical probabilities.

Expected tangible loss method : A method that directs the risk
manager to select the tool that would produce the lowest average
tangible rupee outlay in the long run.

Insurance : A transfer under which the source of funds is an insurer.
As an institution, insurance is a device that combines the risk of two
or more insureds through actual or promised contribution to a fund
out of which claims are paid.

Internal rate of return method : A capital budgeting method under
which the financial manager first calculates the discount rate that

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